S&P cuts Genworth life unit rating

Standard & Poor’s Ratings Services said today that it has reduced the credit rating it has assigned to Genworth Financial (NYSE:GNW) one notch, to BBB minus, from BBB.

The company rating agency cut the insurance financial strength rating it has assigned to Genworth Life Insurance Company’s and Genworth’s core U.S. life operations to A minus, from A.

S&P said it changed the parent company’s rating because of concerns about the weakness of the global economy, the challenges facing Genworth’s mortgage insurance operations, and Genworth’s decision to let two 5-year credit facilities expire rather than trying to renew the credit facilities.

“Although we don't think a full renewal was necessary given a shift in its mix of businesses, the move highlights a straining of its financial flexibility in the capital markets,” S&P said in a comment explaining the change.

“The U.S. life operations are being downgraded one notch because of the business's sensitivity to interest rates (fixed annuities and long-term care [LTC]), and its underperforming legacy term and LTC blocks that will take time to stabilize and improve,” S&P said. “In addition, financial flexibility continues to be affected by the ongoing stress at the holding company and the expectation for the life operations to support holding company interest expenses.”

The analysts identified strength in the market for interest-sensitive long-term care insurance (LTCI) as being one of the company’s main competitive advantages.

“Lapsation, morbidity, termination rates, and interest rates have all led to the deterioration of the block, necessitating the large premium increases that [Genworth] recently announced,” S&P said.

S&P said it believes that Genworth managers have “successfully hedged a significant part of its interest rate risk on its LTC block” through forward-starting swaps.”

“As of second-quarter 2012, it has more than $2 billion in cash-flow hedge gains in accumulated other comprehensive income,” S&P said. “Assuming interest rates stay level, these gains will be amortized into earnings over time.”

S&P noted that one risk facing the ratings it has assigned Genworth is the possibility that company managers could fail to stabilize the performance of the older LTCI policies.

Genworth is disappointed that S&P took the actions that it took, a Genworth spokesman said in a statement.

“We do not expect these downgrades (at the holding company level, for U.S. life insurance, and for European mortgage insurance) to have a material impact from a commercial, liquidity, or financial perspective,” the spokesman said. “And we are encouraged by S&P’s statement that they ‘believe that the ongoing strategic review will address many of the factors that currently strain the company’s financial flexibility.’”

Genworth is continuing to pursue “strategic and financial actions” that should build shareholder value, and the company plans to talk about those actions Oct. 31, during its third-quarter earnings call, the spokesman said.